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Southern District of New York Dismisses Exchange Act Claims Against Former Pharmaceutical CEO
07/18/2016On July 6, 2016, Judge Paul A. Engelmayer of the United States District Court for the Southern District of New York dismissed with prejudice federal securities class claims against the former CEO of an Australian pharmaceutical company, QRx Pharma Ltd. (“QRx”). Gillis v. QRx Pharma Ltd., No. 15 Civ. 4868 (S.D.N.Y. July 6, 2016). Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connections with statements about the FDA approval process made while one of the company’s drugs was under review. Judge Engelmayer granted the CEO’s motion to dismiss the claims on the grounds that the alleged misrepresentations about the FDA’s process and the likelihood of approval were inactionable opinion and/or forward-looking statements and because the complaint failed to allege scienter adequately. This decision signals continuing skepticism of securities claims against pharmaceutical and medical device companies that are brought when developmental products are not successful in trials and/or do not receive regulatory approvals.
Plaintiffs contended that statements attributable to the CEO about the approval process and the likelihood of approval were misleading because the FDA allegedly told QRx that the drug would have to meet a “Superiority Requirement,” which was a higher standard than the one the company believed should have applied. The FDA ultimately declined to approve the drug in part because it did not meet this higher standard.
The Court analyzed each allegedly misleading statement. Based on its analysis of the FDA’s communications with QRx, it held that statements made early in the approval process were in fact not misleading. In so holding, the Court held that QRx had no generalized duty to disclose all interim feedback received from the FDA during the drug application process. The Court also held that statements about the drug’s future and the likelihood of approval were statements of opinion and/or forward-looking and therefore not actionable because plaintiffs did not allege that the opinions were not honestly held or that any statements were made with actual knowledge that they were false or misleading.
The Court declined to address whether one statement made later in the FDA’s review process about the applicable standard was actionably misleading because it determined that plaintiffs did not adequately allege that the CEO acted with fraudulent intent. According to the Court, the allegedly fraudulent scheme “lack[ed] a coherent rational objective” because plaintiffs did not allege that the CEO or any other high-level QRx employee stood to gain from continuing with a drug application process that plaintiffs implausibly claimed the company and its executives knew was destined to fail.
